Saturday, June 24, 2006

Salinger on Price Gouging

In today's Wall Street Journal, Michael Salinger (chief economist at the FTC, on leave from BU) has a nice piece on price gouging in the market for gasoline. It is based on a recent FTC report.

The bottom line is no surprise:

Just before Memorial Day, the FTC submitted its report to Congress. While the investigation found some instances of price gouging as defined by Congress, the staff concluded that virtually all the cases meeting the statutory definition were the result of competitive market forces, not market manipulation. More generally, the FTC staff concluded that the market worked much as one would expect a competitive market to respond to a shortage.

Mike also discusses the possibility of new federal laws to regulate price gouging. He views legislation as perhaps inevitable but certainly ill-advised. He suggests that we econ profs assign our students the following exam question:

Oil industry critics argue that lower inventory holdings have left the industry more susceptible to supply disruptions. How would 'price gouging' legislation affect the incentive to hold additional inventories to sell during shortages?

He offers this interesting tidbit:

the FTC investigation uncovered examples of gas stations that shut down rather than risk a suit under a state price-gouging statute.

Finally, he leaves us with this observation:

Professional economists are, of course, accustomed to giving unheeded advice.

About Me

I am a professor and chairman of the economics department at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.